Steel Stocks: Investments that Hold Weight

Includes: CMC, PKX, RS, USAP
by: Energy Solutions Partners

I like companies that produce tangible products, something that if you drop it on your foot, it hurts, For example, re-bars, structural pipes, flat rolled, tubular products, I-beams, stainless steel, tool steel, ingots, blooms, billets, bars, structural beams, etc. All of these products could put a dent in your foot, but might also put some cash in your pocket.

Steel is basically iron ore with carbon used as a hardening agent. Other alloying agents are also used. Steel is incredibly versatile, depending on the elements added to the alloying process, one can control hardness, tensile strength, and ductility.

Steel stocks offer an extremely wide array of industries to invest in. The way I look at it, when you invest in a steel company, you are not investing in the steel industry, but the industry in which these firms sell their steel products to:

  • Infrastructure construction
  • Commercial construction
  • Oil and gas distribution
  • Oil and gas exploration
  • Automotive
  • Appliances
  • Aerospace
  • Agriculture
  • Recyclers
  • Water projects
  • International infrastructure
  • Construction raw material for steel, iron ore, zinc, manganese, tungsten, etc.

So there is no one demand for "steel". There is demand from the above many industries. Being in cyclical industries, steel firms have had a bad reputation. This is unfounded in my opinion, as the steel industry has learned its lessons from its cyclical past. Now steel companies understand paying down debt is a wise use of cash flow when times are good. Consolidation is also a ongoing dynamic in the steel industry that is likely to continue.

Another positive for these steely investments: valuations

Most steel equities are trading below 12 times earnings. Cash flow from operations are also very strong, with an average cash flow yield of around 20% for the steel stocks I track. Before investing in a steel company, investigate the industries that the steel firm sells into. My favorite steel industries are:

  • Infrastructure construction
  • Oil and gas distribution, exploration
  • Aerospace
  • Recyclers
  • Water projects
  • International infrastructure, construction

My current best steel investments:

One factor for investors to consider is the timing of purchasing cyclical stocks. Historically, the best time to buy a cyclical equity is when they are losing money, or have low earnings and high P/Es. My personnel view is to buy a solid long term business, with high cash flow yields, regardless of the cycle, as I have been unable to time the market in past.

Disclosure: Author currently owns stock in USAP and IIIN

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